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With all presidential elections, there is a lot at stake. If you're considering purchasing or refinancing a home, you may wonder how the president-elect could affect mortgages.
Here's what you need to know about how the president-elect can impact mortgages. That way you'll be prepared for what could happen if you need a home loan after the election.
The Federal Reserve (or "the Fed") is the central bank of the United States. Congress created the Federal Reserve, or the Fed, back in 1913 to help control the supply of money and to maintain stability within the U.S. financial system.
While the Federal Reserve is supposed to be apolitical, the president does have the authority to appoint the Federal Reserve's Chairman -- or, potentially, to remove him. The president can also nominate members of the Fed's Board of Governors with approval from the Senate Committee on Banking, Housing, and Urban Affairs.
Chairs and Vice Chairs, as well as Governors, serve on the Fed only for a limited period of time. That means presidents have the opportunity to appoint some members of the Federal Reserve. Generally, presidents appoint individuals whose economic theories they agree with. Depending on who is in office, the individuals the president appoints may make wildly different decisions regarding interest rates and other measures used to control the country's monetary supply.
The president can (and often does) make recommendations to the Fed. However, the Federal Reserve Board acts independently of the president -- they don't have to listen to the president's opinions.
If the Federal Reserve expects a period of strong economic growth, the Fed may raise interest rates slightly in order to control inflation (the rising cost of goods or services). A higher budget deficit could also prompt the Fed to raise rates. On the other hand, if the Fed notices signs of an upcoming recession, it will likely reduce interest rates to encourage more growth.
The Federal Reserve often reacts to stated economic policies of the current president or president-elect. It might also make an educated guess on whether the country's new leader is likely to take a pro-business stance, or likely to expand or shrink the deficit. Based on the Fed's belief about the direction of the economy, it may raise or lower rates -- which, in turn, can impact mortgages.
The Federal Reserve does not set the mortgage interest rates that homebuyers pay. Instead, it sets the overnight rate at which banks can borrow from each other. This is also known as the federal funds rate.
The federal funds rate is one of a number of factors that impact mortgage rates. Lenders also use economic indicators such as unemployment, inflation, and the bond market to set rates.
Often, when the Fed's benchmark rates are set very low -- as they are right now -- mortgage lenders pass along some of the interest savings to consumers. Thus rates on home loans become or stay more affordable.
The 10-year Treasury yield is widely considered to serve as a benchmark for mortgage rates. That's true in large part because mortgages and treasury bonds compete for the same investors. Mortgages are seen as a slightly riskier investment than Treasury notes, so lenders usually keep mortgage rates just a little bit higher.
Another factor that can affect mortgage rates is the demand for mortgage-backed securities. The easier it is to sell mortgages to investors, the lower rates can go.
The Federal Reserve is currently buying mortgage-backed securities to encourage liquidity in the housing market. That means banks don't have to worry about getting stuck with loans on their books as they can be easily packaged for sale to the Fed. This makes it easier for would-be borrowers to secure a mortgage loan. It also helps to keep rates down, since lenders take on less risk.
Investor confidence, the economy, and whether the country is in a low- or high-rate economic environment all impact mortgage rates. Other factors that can influence mortgage rates include supply of credit and demand for mortgage loans. While the president can influence some of these things, the president can't directly control any of them.
The president could also impact the cost and availability of mortgages by loosening or tightening financial regulations.
For example, following the 2007-08 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. It included much more oversight for financial institutions engaged in mortgage lending. If the president supports or endorses policies that make lending more difficult or expensive, lenders will pass the added costs onto consumers.
If you want to buy a home or refinance during a presidential election, you may want to lock in your rate before the vote. There are a number of ways in which the president-elect could affect future rates. For example, mortgage rates are near record lows right now. But there's a very real chance they could go up after the election.
The Fed is unlikely to reduce the federal funds rate right now, as that could take it into negative territory. It might, however, raise it based on the next president's economic policies. In addition, if the president supports any new housing market regulations, those regulations could also have an impact on mortgage rates.
The president can't directly control mortgage interest rates. However, the Federal Reserve could change the federal funds rate or cut back on the purchase of mortgage-backed securities as a result of the election. This would lead to lenders charging customers more.
If you don't want to take a chance of mortgage rates rising after election day, it might make sense to finalize your loan now. And don't forget to make your voice heard by voting when the time comes.
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